Fat cats' pay is the result of greed, not competition

Why are high wages showered upon some while others toil long hours at essential work for very little? Whatever else Labour has done, it has not erased from national consciousness the dismal Thatcher maxim: There is No Alternative.

"It's the market" is the cry, assuming Adam Smith's divine invisible hand has immutable laws to explain what looks irrational to the naked eye. Is it just too painful to think there is no good reason why the weary care assistant earns £1 for every £100 her chief executive gets?

Here comes new research to puncture the useful excuses top managers use to hide their blushes over skyrocketing salaries. Nick Isles's Life at the Top: The Labour Market for FTSE-250 Chief Executives, published by The Work Foundation, quietly pulverises conventional reasons for over-paying managers.

The median salary of FTSE-100 top bananas has grown by 92% in the last 10 years to £579,000, while inflation rose only by 25%. But it was the recent bear market that tore away the fig leaf from executive pay and got Patricia Hewitt at the DTI protesting. In 2001, when the value of top companies fell by 16%, top executives gave themselves a 12% increase in pay, with bonuses up by 34%.

For 10 years now both Conservative and Labour governments have commissioned reports - Greenbury, Hampel and others - wringing their hands, begging remuneration committees to moderate their greed, all to little avail. Ever reluctant to legislate, the government exhorts shareholders to take action against pilfering. Shareholder protests lead to naming and shaming once a year at AGMs, but chairmen seem to regard the annual public humiliation a price well worth paying for their booty, pretending they must pay top dollar for top talent in a global market.

Nick Isles makes elegant mincemeat of business's three excuses. First there is risk: true, the shelf-life of top CEOs is not long, but average male job tenure is only five-and-a-half years. While CEOs walk straight into other highly paid directorships, 3 million men ejected from jobs in mid-life never find another.

Take "visionary leadership": Isles quotes voluminous research to show CEOs are clever and talented but rarely exceptional. Despite the rhetoric of visionary leaders, for every Branson there are 100 bureaucrats; stewards, not risk-takers. Most prefer deal-making and mergers to boost short-term share price to the hard grind of managing their companies. There is no shortage of able people eager to do the job. No one is indispensable - not prime ministers, not columnists.

But "the market" is their best excuse: here Isles lands his biggest blow. There is little global market in British managers. People don't want ours and we don't often recruit from abroad: 86% of FTSE CEOs come from the UK, another 6% from the EU (many from Ireland) and 8% from the US and the rest of the world.

What's more, most businesses don't even recruit their CEOs from outside their companies. Some two thirds of FTSE CEOs were home-grown from within their companies. So why is their pay rising when there is no hot market out there? US CEO salaries are 10 times higher than here. But French and German CEOs are paid less, although their companies' productivity is higher.

When all other arguments fail, apologists fall back on a blase view that CEO pay is such an infinitesimal part of a company's outgoings that it hardly matters. But it does. Isles accumulates research showing how dysfunctional it is. Managers set an example in their psychological contract with their staff: large pay differentials demotivate and demoralise. When differentials between top and bottom exceed 14:1, morale slides.

The infectious culture of mega-pay is something the government must take seriously. Escalating pay at the top is starting to fracture all kinds of organisations. It is infecting the public sector, causing resentment and storing up future trouble, as some town hall and hospital CEOs catch the disease, leapfrogging the prime minister's £175,000. Paying lower and middle-ranking public staff better is essential to recruit and retain them, but top jobs are filled from a small pool of experienced people where competition is purely inflationary.

How people are rewarded matters. People understand the luck of the lottery, the visibly unique gifts of a David Beckham or the obvious entrepreneurialism of a James Dyson. But interchangeable managers who manipulate an imaginary market to inflate their pay should be checked. Income tax is the fairest way. Tony Blair keeps attacking the Lib Dems for advocating raising the tax rate to 50% on all earnings over £100,000. But his protestations hit a false note, out of kilter with what the public thinks about greed and the widening wealth gap.

Polls show most people think £100,000 is more than enough - and no one is proposing confiscating the rest, just taxing it. Median pay is £21,000, so half the population earns less than that. £100,000 is nearly five times above that, only earned by 1% - and taxing it more would yield £4.7bn in cash the Treasury needs. (It could buy the highest-quality children's centres for every child, and more besides.)

But beyond cash, the point is the symbolism of a government indicating firm disapproval of excess, exhorting organisations to keep a 14:1 ratio of top to bottom pay for the psychological and economic good of society. Blair mistakes how the symbolism of this tax would work. He thinks it only makes the Daily Mail shriek that "middle England" is being hit again. But by no stretch of the imagination is the 1% earning over £100,000 "middle England". Middle England dislikes greed, too. Symbolism is government's most powerful tool, yet Tony Blair has made poor use of it.

If the ghost of Christmas yet to come haunts him tonight, it will point to his still unwritten epitaph. His memorial awaits a chiselled definition of the Blair era. Reprimanding greed would help define his poverty goals in the public imagination.